I suppose it had to happen. LaMettry’s Collision in Minnesota, clearly a small employer, has been sued by a couple of its employees (not sure if they still work there) for excessive plan fees. This is not the precise reason, but it’s effectively the situation. From what I can tell, the fees are truly ridiculous. Not sure I would call it a scam but…ok, it’s a scam!

While not a tiny plan – it has $9 Million and 114 participants – it is certainly not large. So, what does this mean for other smaller employers? Are micro plans going to be targeted? Plans under $5 Million? Or what about plans under $1 Million?

I have mixed feelings about this. Running a small business presents many challenges. I am sympathetic to the owners’ circumstance. Maybe they have been doing the best they can to satisfy the needs of their consumers, grow their business, and provide for their employees as well.

For competitive and personal reasons, I assume they felt like they needed to offer a 401k. And I’m sure they relied on the professionals calling on their plan. But now that they that have been sued, wouldn’t they have been better off just paying their employees more and letting them do whatever they wanted with the money?

Yet, is there a reasonable excuse for a plan with absurd fees? I’m not talking about average fees – which are too high anyway. This plan is just plain awful. Some plans for smaller employers are so filled with excessive fees and conflicts of interests that it is hard to feel sympathy for the fiduciaries.

I come across employers who have virtually never bid their plan. I am not exaggerating. They have not compared options in 15 to 20 years. A review of the plan might involve a conversation with their current custodian, vendor, agent, broker, or whomever. They ask how their plan is doing. Their contact tells them they are doing fine, and they get on with their business.

I don’t know how this case will shake out. The suit claims that the per participant costs for plans with more than 100 participants should be $18 per participant a year. This is preposterous. On the other hand, I also know this plan is grossly, grossly overcharged.

Regardless of what happens, smaller employers have to take notice. Fixing a plan, and severely limiting liability, is just not that hard. Do the following: 1) Eliminate revenue sharing – period: 2) Always, always use the lowest cost share class; 3) Pay flat or per participant fees for advisory support and record keeping; 4) Offer an array of low-cost index funds; and 5) Eliminate insurance or broker/dealer charges. If you can’t do all of these at least do some of them!

Unfortunately, employers don’t know what they don’t know. This is not good when they carry the responsibility and liability. Cases like this will make the liability less theoretical and more real!